Tenants rarely finds commercial spaces that meet their needs without requiring some customization. A tenant’s business must be able to operate efficiently in a space. Creating a space that is updated and comfortable for customers and employees may be critical to the business’s success. To prepare the space for a tenant’s initial occupancy, tenant improvement work is required.
Tenant improvement negotiations are a critical part of the commercial lease process. Tenant improvement work is specific to the individual tenant’s needs, and the landlord is typically providing a tenant improvement allowance, which is money the landlord is willing to put into the space for specific improvements to meet the tenant’s particular use of the space. Moreover, discussions about tenant improvement work are often the first opportunity the landlord and tenant have to work together. It is essential that the parties clarify the work to be done and each party’s responsibilities to help prevent conflicts from arising that may jeopardize the landlord-tenant relationship before the tenant even moves in.
As much as possible, the parties should make detailed plans and specifications, create a construction budget and schedule, and decide what happens if there are delays or cost overruns. Some of the crucial questions that need to be asked upfront to prevent misunderstandings and unwelcome surprises are:
Depending on the type of lease and space, the landlord may do the majority of the improvement work. The landlord needs to know what it is obligated to deliver, and the tenant needs to know what it is getting when it is time to move in. In other cases, the tenant may be authorized to make the improvements, usually subject to the landlord’s approval. The tenant needs to understand the landlord’s parameters for the work, such as whether structural changes are allowed or if only certain contractors may be used. If both parties have some oversight and participation in the work, clarifying the schedule of work to be performed avoids delays or interruptions caused by the other party.
The parties must determine how much of the landlord’s tenant improvements allowance covers the work that the tenant wants to do and who is responsible if costs exceed that amount. The allowance may also be limited to standard labor and materials for construction but not consultant fees or higher quality materials.
How the parties will address construction delays or breakdowns in the landlord-tenant relationship should be addressed at the start to avoid parties having to make these decisions after the problem has arisen. For example, if the tenant’s improvements are not finished by the date the tenant expected to move in, is the tenant still responsible for paying rent on a space it cannot use?
Lease agreements may require the tenant to remove all alterations and restore the premises to its original state at the end of the lease term. Typically, the landlord owns all the improvements made to the building, even if the tenant paid for them. However, certain improvements, like wiring or flooring, can be expensive to replace and may suit the next tenant’s needs, so the landlord benefits from having the option to decide what the tenant removes.
Failing to specify tenant improvement work or relying on boilerplate provisions often will not accomplish the parties’ goals and needs in a commercial tenancy. This can lead to unpleasant and expensive surprises that require more negotiation to resolve. Instead, parties will benefit from taking the time at the beginning to specify in as much detail as possible what they need and expect from the tenant improvement work.